Background and aims Despite the European Union (EU) Tobacco Tax Directive (TTD), a lack of convergence in EU tobacco prices promotes high levels of cross-border shopping and down-trading from factory-made (FM) to roll-your-own tobacco (RYO) cigarettes. This study presents a blueprint for reform, whereby minimum taxes are related to the overall price level in the EU and where taxation of RYO is related to that of FM.

Methods Longitudinal data on prices and taxes on FM and RYO in 25 member states over 2011–2019 are used to estimate econometric models for their weighted average prices as a function of taxes. Two scenarios are simulated with the models’ estimates: a baseline scenario for the actual tax stance pertaining to 2020 and a reform scenario implementing the blueprint.

Results The baseline results show that, while the prices of both products have experienced a slight increase since 2016 in real terms, the dispersion in the prices of FM across countries has increased and the difference in the prices of RYO within countries has widened. The results for the reform scenario show dispersion would diminish both EU-wide and in hotspots for cross-border sales of FM. The reform would also lead to a substantial reduction in the price gap between FM and RYO.

Conclusion To promote price convergence and close the price gap between FM and RYO, the revised TTD should ensure minimum FM taxes track a measure of their average EU price, and RYO taxes are related to FM taxes.